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Could the Storm Breathe Life Into Copper Prices?

1 November 2012 in Trading Ideas

It has not been a great run lately for investors in copper. After the metal hit its 2012 high in February, it was down by more than 15% less than four months later.

Similarly, a surge in prices in early September was entirely given back by the end of October. At this point, copper sits within a percent or two of where it began the year.

When we last visited copper prices in late September, we noted that the runup seemed to stand in stark contrast to the increasingly high piles of the metal that was sitting in warehouses in China, which just happens to be the world’s largest consumer of copper. In fact, its consumption has grown to more than one-third of the world’s total in 2012, according to the Wall Street Journal.

For those investing in copper, a boost in demand could be just the ticket (while the Dr. Copper motif has risen 5.8% in the past month, it’s worth reiterating that a collection of copper mining stocks and the metal itself are not one and the same. For example, several of the motif’s larger components also mine for other metals.)

The question is: With the US now reeling from one of the 10 most costly catastrophes in its history (according to the Insurance Information Institute), would it be wrong to think that the region’s massive infrastructure repair job to come could be a boon for copper prices?

Unfortunately, it might be.

Almost unbelievably, as bad as Hurricane Sandy was, it seems as though it wasn’t an infrastructure blowup. In an Oct. 29 report in the Journal, Jason Schenker, president of Prestige Economics, said in a note before the storm hit that damage to infrastructure probably wouldn’t be significant. That would likely mean Sandy would be “neutral for industrial metals.”

The Journal said traders cut bets on higher copper prices amid weaker Asian and European equity markets, while the entire European debt crisis dragged growth-sensitive assets with Spain posting a record drop in retail sales in September.

That sort of fretting about other parts of the world has pushed the dollar higher, putting pressure on the dollar-denominated copper by making futures more expensive for buyers using other currencies. The US Dollar Index has risen since recent lows in mid-September, and as long as that trend continues, it will be difficult for dollar-based commodities to advance higher while demand appears to be dropping off.

On the other hand, the notion that China may avoid a hard economic landing could be losing steam, theoretically putting a floor under prices for copper.

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